Veradigm Inc.
Q2 2015 Earnings Call Transcript

Published: 5 Aug 2015

[Operator:]

Good afternoon. My name is Cheryl Lynn and I will be your conference operator today. At this time, I would like to welcome everyone to the Allscripts Second Quarter 2015 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Seth Frank, Vice President of Investor Relations. Please go ahead.

[Seth R. Frank:]

Thank you, Cheryl Lynn, and good afternoon, everyone. Our speakers today are Paul Black, President and Chief Executive Officer of Allscripts, and Rick Poulton, Chief Financial Officer. Some of the statements that we'll make today may be considered forward-looking, including statements regarding future investments and our future performance. These statements involve a number of risks and uncertainties that could cause our results to differ materially. These forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise these forward-looking statements in light of new information or future events. Please refer to our SEC filings for more detailed descriptions of the risk factors that may affect our results. And with that, I'd like to turn the call over to Paul Black, CEO of Allscripts.

[Paul M. Black:]

Welcome to the second quarter earnings call. We appreciate your joining us on a busy night for you. This is a big week for Allscripts. We are speaking to you from Boston. Tomorrow, we are kicking off ACE 2015, the Allscripts Client Experience. Thousands of clients are joining us for three days of education, networking and celebration of their success. We look forward to hosting the investment community session tomorrow morning, beginning at 11

[Richard J. Poulton:]

Okay. Thanks, Paul, and good afternoon, everybody. As I review the second quarter details, please reference both our GAAP financial statements, as well as non-GAAP tables in our earnings release and then the supplemental data book that's posted to our Investor Relations website. We received overwhelmingly positive comments regarding the financial presentation format that we provided last quarter. So I'm happy to report that we have continued in this format and there are no presentational changes for you to digest this quarter. As you all know, we announced preliminary results on July 16, and I'm very happy to report that our actual results for all metrics came in at the high end of the preliminary ranges that we provided at that time. Paul covered our high-level results pretty comprehensively, so now let me provide some more color with a few details, starting with our bookings. We're pleased with where we stand at the midpoint of the year, thanks to a strong 11% year-over-year growth rate in Q2. Total bookings were $260 million. Of this, approximately $170 million, or 65% was related to software delivery. Recall that software delivery includes subscriptions, licensed software, hardware and transaction-related revenue. Maintenance that's associated with perpetual software licenses are not included in our bookings calculations when we report them to you. These software delivery bookings are up 25% for the quarter and for the six-month period. So they are growing significantly higher than our overall bookings growth rate. And as you can see from the P&L, software delivery revenue has a significantly better margin profile than our client services. The remaining $90 million of bookings, or 35%, related to client services. Recall that this includes both managed services contracts, as well as other project-based client services revenue. Within client services, the 7% bookings decline in the quarter compared to last year is driven by a decrease in non-recurring services or what we call other project based client services and revenue, like implementation and upgrades. This is a trend that we have now talked about for a few quarters, so it's not new, but recurring managed services, such as remote hosting, outsourcing and revenue cycle management services continue to contribute meaningfully to our client services' totals, and our pipeline of future opportunities for these recurring managed services contracts looks quite strong. So, as a result of our sales activity for the quarter, our contract backlog was $3.5 billion, a 6% increase year-over-year and up $70 million from the end of the first quarter. Moving on to revenue, at $352 million for the quarter, we were relatively flat compared to last year and we were up significantly from Q1. However, we saw similar trend to what we saw in Q1 whereby growth in – we had growth in year-over-year in recurring revenue and we had declines in our non-recurring revenue. The recurring revenue, consisting again of subscriptions, recurring transactions, maintenance and recurring managed services increased 8% year-over-year and it constituted 75% of our total revenue. If you exclude support and maintenance revenue from this recurring total and which as we've discussed in the past, we did not expect to grow much due to an increasing client preference for subscription-based models, our recurring revenue increased 12% on a year-over-year basis. We had strong 17% growth of recurring managed services, driven by our backlog conversion for hosting, outsourcing and some initial success from our efforts within revenue cycle services. Our support and maintenance was up slightly year-over-year, but down slightly from Q1. As we've discussed with you previously, we can experience some modest quarterly variability in support and maintenance revenue, due to variables such as credit memo processing, contract restructurings and accounting rules applied to client activations, but we continue to view support and maintenance revenue as very stable and we would expect a quarterly range of $115 million to $120 million as we look forward. Although non-recurring revenue was down 19% year-over-year, a similar decline to what we experienced in Q1, we were pleased that in absolute dollars terms, it bounced back from the trough levels that we experienced in the first quarter, as both our project-based services, as well as perpetual license sales experienced a better quarter. Long term, we continue to emphasize recurring revenue in our new sales activity and we do that in order to help provide more predictability and buffer what modest volatility we may have in the non-recurring buckets. Turning to non-GAAP gross margins, as we foreshadowed for you in the first quarter earnings conference call, performance significantly improved in Q2. At 44.2% for the quarter, this was a 190-basis point improvement from Q1. The primary driver of improvement came as a result of us taking actions to align our resources with client demand, primarily within our client services organizations, to bring our services' cost structure in line with the anticipated revenue. Again, we talked to you about that at length in Q1. We executed on what we talked to you about and we began to realize some of that benefit in the quarter. Those actions did occur in early May and so we saw partial impact in Q2. Looking ahead, I would expect client services margins to float up in Q3 and to reach low double-digit levels by fourth quarter of this year as a result of these actions. In addition, during the quarter we completed renegotiations with our two largest remote hosting partners to improve the operating cost structure of our hosting footprint. As a result of these renegotiations, we anticipate a full run rate of approximately 800 basis points of margin improvement on our current hosting revenue, which is approximately $80 million annually. We'll begin to realize this benefit late in Q4, but be at a full run rate by Q1 of next year. Moving to our operating expenses, Allscripts' non-GAAP SG&A declined slightly from the year-ago period, down to $74 million. We continue to manage SG&A aggressively and will look for additional opportunities to leverage these expenses. Note that quarterly variation can occur, as in the quarter, we have timing of certain marketing expenses that can primarily – or have some seasonal nature to them. And in connection with the resource alignments – adjustments that I just discussed, we did record a severance charge of approximately $7 million during the quarter. This is excluded for purpose of calculating non-GAAP SG&A, non-GAAP operating income and adjusted EBITDA, the same way we've done in the past. I'd like to make a comment on R&D. It's important to have a clear perspective on R&D. On the income statement, we recorded a total charge of $44 million, but we were also eligible to capitalize $12 million to our balance sheet in the quarter. And thus, our total gross R&D spend of approximately $57 million is a slight increase from where we've been in the last several quarters. So we continue to maintain a strong commitment to investing in our solutions while we continue to build our profitability at the same time. Looking ahead into Q3, I would not expect to have a severance charge anywhere near as large as we experienced in both Q1 and Q2, but I do expect to record a small charge of approximately $2 million to $3 million for transaction fees and work efforts expended for the DoD contract effort. Moving down the P&L, adjusted EBITDA, as calculated on table five of our press release, was $62 million, a 17% increase, and 260 basis point improvement in margin compared to a year ago. In terms of interest expense, as is typical, we recorded approximately $2.6 million of non-cash interest expense related to our convertible notes and we do continue to exclude this from our non-GAAP net income. Non-GAAP net income for the quarter totaled $23 million overall, and this equated to $0.12 per diluted share. This compares to $0.09 per share a year ago, or a 33% growth rate year-over-year. Year-to-date, our non-GAAP net income is $38 million, and as we disclosed in the press release, we have generated $58 million of free cash flow during the same six-month period. So we are quite pleased at our conversion rate of approximately 150% and we'll continue to make this a point of emphasis as we look ahead. As Paul indicated in his remarks, we are reaffirming our full-year revenue guidance of $1.4 billion to $1.43 billion, our full-year adjusted EBITDA guidance for a range of $230 million to $250 million, as well as reaffirming our full-year non-GAAP EPS guidance of $0.42 to $0.50 per share. Regarding share count, given the investment in Allscripts by Dr. Soon-Shiong, Allscripts diluted share count for purposes of calculating non-GAAP EPS will be approximately 191 million shares, beginning in Q3. And finally, in terms of quarterly progression, we would expect Q3 revenue to be similar to Q2 and we expect some modest increase in Q4 revenue given the general seasonal and revenue mix trends that we have in non-recurring revenue. So with that, I'd like to open it up for questions, and we're happy to start, operator, when you're ready.

[Operator:]

Your first question comes from the line of Robert Jones with Goldman Sachs.

[Nathan A. Rich:]

Hi. This is Nathan Rich on for Bob this afternoon. Congratulations on the bookings performance. And it seemed like the strength was actually fairly broad-based, which is encouraging. I was just wondering if you can maybe give us a sense of where the upside came versus your internal expectations. Maybe how much did the new agreements with North Shore-LIJ and New York-Presbyterian contribute to bookings in the quarter? And just as we think about the back half of the year, anything that we should be aware of in terms of cadence of bookings for 3Q and 4Q?

[Paul M. Black:]

This is Paul. Those deals were very important and very strategic to us, but I wouldn't categorize them as over the top with regards to size. So we had a lot of deals that got done that were, if you will, larger than what we've done in the past, so a larger number of mid-size deals we didn't have in the acute care side, those deals representing a substantial amount of money. It's not insignificant, but they weren't monster deals. From a going-forward basis, looking at Q3 forecast internally and looking at it for the rest of the year, I think that we've guided to what we think we're going to hit, and I feel very good about that guidance because we review it every week.

[Richard J. Poulton:]

Nathan, I would add to what Paul just said is I mean, again, Sunrise as a platform was a strong force in the quarter, but no single deal popped it in any way, shape or form. But real strength continues to be on the ambulatory side of our business as well. We have a lot happening there as we continue to penetrate new footprints, new managed services, arrangements with our existing base and also expanding our Payer and Life Sciences opportunities. So we've had support broad-based across the platform.

[Nathan A. Rich:]

Great. Appreciate the detail. If I could just ask one quick follow-up on the restructuring actions that you guys talked about. You mentioned client services margins kind of being up in 3Q and then low double digits in 4Q. Is that the run rate that we should think about as we look out to 2016 for client services margins?

[Richard J. Poulton:]

Yes, That's the run rate you should expect to enter 2016 at. As I mentioned, the reason I made the comments on – we completed renegotiations around our hosting this quarter as well. Those benefits we get a little taste of it in Q4, but mostly that starts to hit us in Q1. So I think we're going to enter Q1 with some momentum to continue to improve that.

[Nathan A. Rich:]

Great. Appreciate the detail. Thank you.

[Paul M. Black:]

Thanks, Nathan.

[Operator:]

Your next question comes from Michael Cherny with Evercore ISI.

[Unknown Speaker:]

...in for Michael. I know it's early in the deal, but I was just wondering what the early customer reaction has been to the NantHealth announcement?

[Paul M. Black:]

Yes, they've been positive, especially our larger university academic medical centers. Many of them have a genomic sequencing initiative going on. They've been working on this set of data and these initiatives for a very long period of time. The thing that we bring to that is the new infrastructure and the set of capabilities that perhaps wasn't available to either them or to us in the past. Dr. Soon-Shiong has a pretty complex and a pretty complete thought the way that he's going to deliver not only the genotypic information off sequencing machine but also what he's planning on doing with killer T-cells and some other additional data that would come out of a completely sequenced genome. So those components get a lot of academic medical center clients pretty excited, and there's been a very big amount of interest in that from that regard.

[Unknown Speaker:]

Great. Thank you.

[Paul M. Black:]

You bet.

[Operator:]

Your next question comes from Sean Dodge with Jefferies.

[Sean Dodge:]

Good afternoon. Thanks. Paul, you mentioned international sales were a contributor to bookings in the quarter. Are there any foreign markets outside the UK that you're seeing particularly strong demand in?

[Paul M. Black:]

Yes, we see a fair amount of activity in the Asia Pacific Rim. We see the United Kingdom, Europe. We also see a fair amount of activity going on in the Middle East. Those are marketplaces that we have feet on the ground, if you will, and tenders or RFPs being left at a national level, in some cases big ones, in some cases medium-sized opportunities, but we're trying to make sure that we are participating in all of them. We have either clients and/or personnel in the countries that I just mentioned, and technically Canada's in our vernacular. It's outside the United States, so we have a really large presence in Canada as well. Typically outside the United States it would be for portal, for connectivity solutions and for Sunrise. And also, I hate to forget to mention Israel, which we have fundamentally the entire country wired because of our investment and their investment in dbMotion.

[Sean Dodge:]

Okay. Thanks. And then can you talk a little bit about maybe the progress that you've made getting clients switched over to Sunrise ambulatory?

[Paul M. Black:]

Most of our clients that have been Sunrise clients for a long period of time are looking at revenue cycle, they're looking ambulatory, they're looking at ED and they're looking at surgery as three or four different big products that we've come out with in the last couple years that are now industrial strength. And most of those clients have either started a pilot with us or are in contemplation of participating in a cross-selling event with us. So to have a disparate system that's doing that for them, they're pretty interested in what we have to offer, especially the client feedback we've received through class course (26

[Sean Dodge:]

All right. Thanks again and congratulations on the quarter.

[Paul M. Black:]

Thanks, Sean.

[Operator:]

Your next question comes from Ricky Goldwasser with Morgan Stanley.

[Zack W. Sopcak:]

Hey. Good afternoon. This is Zack in for Ricky. Congrats on the quarter. Wanted to just ask about the 180 clients that you mentioned that you added during the quarter, and could you maybe talk about, are those leads coming from anywhere specific? Is your sales force getting more efficient? Or is there just some particular suite of products that these customers are looking for?

[Paul M. Black:]

As Rick mentioned, also the interesting thing from my perspective is that there continues to be a very big demand in the ambulatory world, not only for electronic medical records but for revenue cycle management and for ACO tools and services. So we've signed a bunch of deals in Q3 that historically have not been down the middle of the fairway. And in that regard, that's been a very positive story for us. But I would say this quarter, Q2, as we said in our comments, was probably one of the better quarters from an overall balance perspective. Most of our solutions had a nice uptake and I've walked through many of those in my comments.

[Zack W. Sopcak:]

Maybe just one quick follow up on NantHealth. When you think about your customer base, can you – I don't know – quantify or qualify at least how many customers are thinking about this already and are looking for solutions, and how many it's going to be more of a teaching process to get them to where they need to be to understand that they need this?

[Paul M. Black:]

It depends upon where they are in their path. Again, in some cases where they may have already purchased sequencing center or they have a clinical center of excellence for a specific complex disease, those folks have already been somewhat down the path, if you will, and they're quite interested in immediately looking at the solutions that we're providing with NantHealth. Others, it is an education process and I'm surprised at the level of interest in that discussion. We also have a lot of large cancer centers that our clients both on the ambulatory, the in-patient and out-patient setting and those folks have all been have sensed in my perspective some intrigue by this and are asking for more information about it.

[Zack W. Sopcak:]

Great. Thank you.

[Richard J. Poulton:]

Thanks, Zack.

[Operator:]

Your next question comes from Anthony Vendetti with Maxim Group.

[Anthony V. Vendetti:]

Thanks. I was just wondering if you could elaborate a little bit more on the extended contracts at North Shore-LIJ and New York-Presbyterian, just the details in terms of the years or what products in particular?

[Paul M. Black:]

Yes, specifically with North Shore there's a number of different solutions that we have in place with them already, but this one that we referred to today was Sunrise to put in another hospital that they acquired. The same thing with New York-Presbyterian. And in Presbyterian's example, they also extended a contract into middle of – not middle, but the early part of 2020.

[Anthony V. Vendetti:]

2020. And you said at LIJ it was a new hospital and it displaced a current competitor, correct?

[Paul M. Black:]

That is correct.

[Anthony V. Vendetti:]

Okay, great. Thank you.

[Paul M. Black:]

You bet. Thank you.

[Seth R. Frank:]

Next question, please.

[Operator:]

Your next question comes from Garen Sarafian with Citi Research.

[Allen Lutz:]

Hey. This is Allen for Garen. Can you guys just talk about ICD-10? Is that having an impact at all on client demand?

[Paul M. Black:]

I guess I'll take this again. I'll start with the fact that all of our clients have a ICD-10 version of the software installed. That version of the software was installed at the same time that the MU2 software was installed last year. So that's an important starting point. We are working with our clients to test and make sure that we've gone through the paces to understand how the ICD-10 interfaces work with all the different payer organizations. From our standpoint, we're not seeing a slowdown in acquisition of those folks. That could happen, but we have not seen it or witnessed it through Q2 of this year. That's kind of the underpinning question. We also see, in some cases, a interest level in having us provide consultant services to them for us to help and do the evaluation of their ICD-10 readiness.

[Allen Lutz:]

Got it. Thanks.

[Paul M. Black:]

You're welcome.

[Operator:]

And there are no further questions. I will now turn the call back over to Paul and Rick for any closing remarks.

[Paul M. Black:]

Thank you very much for your time today. As you can see, we're very pleased with our results from this quarter. Any one quarter is an important milestone for us. We've got a lot of the work that we've been talking about over the last two years on this call that's coming home to roost and we feel good about that. Our clients are making progress. We're especially pleased that we've got so many successful client examples, not only of global recognition but also just continued success for them to be able to position for the competitiveness in their marketplaces and be able for them to be expanding their margins as they are working on a very tough market with CMS and other organizational cost constraints. So thank you very much for your time, and we look forward to seeing many of you at ACE...

[Seth R. Frank:]

Tomorrow.

[Paul M. Black:]

Tomorrow.

[Operator:]

Thank you for your participation. This does conclude today's conference call. You may now disconnect.